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Gold miner Northern Star ((NST)) has moved to address a shortage of mill capacity, advancing the consolidation of its Kalgoorlie operations in Western Australia. Mid 2017 the company outlined plans to deliver around 300,000 ozs per annum from Kalgoorlie but did not have the mill capacity to meet this target at the time.

The company has now acquired the South Kalgoorlie operations of Westgold Resources ((WGX)) for $80m, comprising $60m in shares at $6.30 a share and $20m in cash. This ensures there will be adequate milling capacity to meet current production targets, with potential upside.

Credit Suisse believes the deployment of the company's scrip is the dominant consideration in this deal. This action is indicative of the premium that is embedded in the paper, while the acceptance by Westgold indicates this was the most competitive pricing arrangement. Nevertheless, it appears to diminish Northern Star's average resource quality, the broker asserts.

Regardless, the transaction brings much-needed milling capacity at below replacement cost, 50km from the company's Kundana operations. Kundana ore is currently being processed at Kanowna Belle, which is around 80km away. Credit Suisse suggests the 1-1.5mtpa expansion of the Kanowna Belle processing facility that was under investigation may be shelved. Critical to a decision on Kanowna Belle was identifying sustainable base load feed to warrant the capital outlay.

Acquisition

The purchase includes the 1.2mtpa Jubilee mill, which lifts processing capacity at Kalgoorlie to 3.2mtpa. Initially, Citi notes, the company may not be able to fill Jubilee with its own ore, although the option is now there. A toll treatment agreement with RNC Minerals for 50% of Jubilee capacity until June 30, 2018 could be useful in the interim, the broker suggests.

As well as the mill, the acquisition includes a 4moz resource that has previously been written down to near zero, Credit Suisse points out, based on infill drilling that did not support what had been regarded as an aggressive estimate.

Citi believes Northern Star should now comfortably lift regional gold production to its target of 300,000ozpa, compared with the 227,000oz that was produced in 2017.

UBS welcomes the deal, as it adds new capacity and growth opportunities. The broker considers the company a quality gold producer, trading at a premium valuation, with little risk of losing its eminent position. Northern Star is renowned for its execution on operations and exploration success. While the acquisition may provide more exploration leverage and increased production, the broker points out the stock is not cheap.

FNArena's database has four Hold ratings and three Sell. The consensus target is $5.41, signalling -18.7% downside to the last share price. Targets range from $4.45 (Morgan Stanley, yet to update on the acquisition) to $6.60 (Citi).

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